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Four Foundational Financial Principles

These are four principles that will serve federal employees well when planning for retirement.

As life zooms from one phase to the next, it’s easy to get caught up in the moment and rush from one busy instant to the next without stopping to evaluate what’s really been happening.

Unfortunately, we often don’t realize anything is wrong until it’s too late. For example, we forget to top off the car with gas until we’re stuck on the side of the road with no filling station in sight.

In personal finance this is often the case. We can assume that however we spend our money is wise, as long as there is a little left over each month. In light of retirement, is this really a good strategy?

Since “an ounce of prevention is worth a pound of cure,” let’s examine four foundational financial principles to address this question and orient our personal finances in these hurried times.

1. Be in a Hurry to Get Out of Debt.

Eliminating debt minimizes the financial stress felt by the compounding ramifications of interest rates. Taking control of this area of your life allows you to divert money elsewhere like renovating your dream home, traveling, helping kids out with college tuition, donating to your favorite charity, and saving for financial freedom in retirement.

Moneycrasher.com has a list of 17 Reasons to Get Out of Debt Today; some of which are listed below for your encouragement.

  • Free up household income.
  • Have more money to invest in retirement accounts.
  • Greatly reduce the risk in your life.
  • Help improve and maintain healthy relationships with spouse, family and friends.

2. Continuously Evaluate Needs vs. Desires.

As the word implies, a need is something we cannot live without. On the other hand, a desire is a mere want or wish. It’s easy to forget this distinction and often a bank statement will reflect this confusion. 

Dave Ramsey suggests an envelope system, where you have cash on hand for different categories of expenses (i.e., dining out, bills, clothing, etc.). As human beings, we have an emotional connection to cash. The pain of breaking the connection helps reduce impulse buying, as you can visually see the currency disappearing as you spend it.

In contrast, swiping a debit or credit card does not have the same emotional effect. Once the cash envelopes are empty, your budget is reached and the money is not there to spend on your desires.

3. Allocate Expenses in Advance.

Both expected expenses and surprise bills are a part of life. Birthdays, holidays, and car insurance premiums, to name a few, are expenses we can plan for throughout the year. Since you know they are coming, you can allocate cash each month to these expenditures in advance. The money will then be available when the bill comes due or when it’s time to celebrate special occasions. 

It may help you to divide regular non-monthly payments down to their monthly costs. So, for example, if you spend $3,000 a year on a summer vacation, block that out as $250 a month.

4. Plan for Transition Periods.

An important transition period in federal employees’ lives is while waiting for final adjudication of retirement paperwork. Typically, final adjudication takes six to nine months to complete, and during this period you may expect to receive an estimated 75% of your pension.

One thing you can do to plan for this transition period is to utilize your unused annual leave check. You will receive a lump sum at retirement for the balance of your unused annual leave, which typically arrives four to six weeks after separation. These funds may help you cover the gap between your former salary and the reduced pension amount.

Disclosure: The information contained in these blogs should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor.

About the Author

Brandon Christy, CPA, PFS, is the founder and president of Retirement Benefits Institute, Inc. He is an established leader in contracted federal retirement benefits education, and his company has trained over 10,000 federal employees to help them gain clarity and confidence in retirement.